QTDP Grants Audit – Cash Basis Taxpayers Take note

During a recent Federal Tax Audit that was focused on the QTDP Grant the IRS agent clarified for us their official position on when to recognize the QTDP grant receipt.  There has been some confusion in this area especially for cash basis taxpayers.  The credit was targeted to therapeutic discovery projects meeting certain criteria and was to reimburse taxpayers for 2009 and 2010 qualified investment expenses.  The IRS began accepting applications for the grant in June 2010.

Our client, a cash basis taxpayer, received and recorded the QTDP grant in 2010.  According to the IRS QTDP Technical Advisor, citing IRC Sections 48D(f)(3), 48D(e)(2)(B) and Notice 2010-45, the qualified investment expenses must be reduced in the appropriate year (2009 grant monies on the 2009 tax return and 2010 grant monies on the 2010 tax return).  In our case, despite being a cash basis taxpayer, the IRS position essentially forces the taxpayer on an accrual basis for the QTDP grant money and amended returns are required for 2009 and 2010.

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